December Income Fund update

And another year bites the dust! This is my last Income Fund update for December 2016. I needed an additional $1,008 this month to beat my 2016 target. Did I make it?

Dividend Income

Total income from my Income Fund in December was $1,838, a 58% increase compared to the $1,161 I received this time last year in December 2015. So, I’m pretty excited about that!

The following chart shows the cumulative dividend income this year compared to previous years.

With total income of $8,698 this year, I’ve easily beaten my 2016 target of $7,800. I achieved a 28% increase over last year’s total income of $6,792.

Income breakdown

The chart below shows a breakdown of the income this month.

Most of the money this month was from the two Vanguard stock funds that I own which pay out on the usual March, June, September and December schedule. VHDYX is a low-cost fund targeting higher-yielding US stocks and it paid out $1,024. VIHAX is a slightly more expensive fund targeting higher-yielding international stocks. It paid out a lower than expected $333.

Individual stocks contributed $216.13 or 25% of the total this month.

The two bond funds (VWEAX and VBIIX) paid a total of $265. Finally interest from the Income Fund cash reserves made up the remaining $0.94; it’s a very small percentage (0.05%) which was rounded to 0% and not shown in the chart above.

Dividend income from stocks

19 stocks paid dividends this month as detailed below for a total of $216. That’s a 12% increase over this time last year.

Last December my individual stocks paid $192.69 from 23 stocks. Since then, I’ve sold three holdings (NHC, VPU and VDE) as I’ve been simplifying my portfolio and consolidating into the two stock funds. UPS is the fourth company missing this month; they paid dividends last month.

Despite the sales, the total cost basis of stocks paying dividends in December has increased by $903 to $23,578 over the year. I have bought additional shares in LB, INTC, MCD and LMT since last December.

Dividends this month increased by an average of 3.6% over the last year all on their own. LB and MAR had the biggest increases with over 20%. CVX and EMR had the lowest dividend growth of 0.2 and 1.1% respectively. This compares favorably with VHDYX’s dividend growth over the last year which was 2.4%.

I’ve included the dividend growth of each stock on a 1-year trailing basis in the table. The yield calculations are annualized, or extended forward a year, based on the current dividend payment against the market value.

Income from funds

I received income from all the Vanguard funds in the portfolio this month.

The two bond funds pay their distributions monthly and are taxed as normal income – not the lower qualified dividend rate that dividends receive. VBIIX paid $7.07 of the $12.48 shown. I only bought into the fund this month so the payment is prorated. The remaining $5.41 was the residual dividend from the higher yielding fund that I sold, VWESX.

Capital Gains can be an additional tax-burden of owning mutual funds in a taxable account. The two stock funds rarely pay capital gains. This month, VWEAX paid out $17.36 in short-term gains and VBIIX paid $20.71 in long-term gains. The capital gains were automatically invested back into the respective fund.

For taxable accounts, it’s more tax efficient to buy mutual funds after they’ve paid their capital gains for the month. That way you get to buy it cheaper since the capital gains distribution decreases the price, and you don’t owe taxes on the capital gains. It makes no difference for tax-advantaged accounts (e.g. a 401k or IRA).

Asset Allocation

My Income Fund asset allocation as of December 2016 is shown below.

Compared to last month, the US stock fund allocation increased from 39% to 42% and the International fund increased two percent to 21%. Individual Stocks decreased from 17% to 16%, and High-Yield Bonds decreased two percent to 18%. The previous 4% in Long-Term Bonds became 2% in Intermediate-Term bonds. Cash remained about the same at 1%.

Overall the Income Fund is at a 79:21 Stocks:Bonds allocation (counting cash as bonds) which is close to my overall target of 80:20.

Detailed Allocation

I’m quite a bit closer to my target allocation this month, as I reduced my target for International Stocks (VIHAX) from 25% to 20%. I also sold some VWEAX too. I can’t sell more though since I’m near the $50,000 minimum for owning the cheaper Admiral class of shares. There’s a chance that Vanguard will downgrade the shares if you sell below their minimum level (they won’t do this if the decrease is only from the market however).

The bond funds are targeted for a combined 20% total weight, with a target 10% in each of the Intermediate-Term and High-Yield funds.

Fund Purchases & Sales

I added $7,472.34 of new money to my Income Fund this month. $2,300 of this was the standard contribution I make from my salary. I also added a further $770 from my monthly income. The remaining $4,402.34 was transferred in from my former Emergency Fund account.

Fund purchases
Total purchases this month were $10,726.09 in VHDYX, $6,200.13 in VIHAX and $5,943.84 in VBIIX for a total of $22,870.06.

$7,356.72 of the purchases were from new Cash added to the fund. The remainder was bought using existing Fund Cash plus proceeds from the two sales listed below.

Funds sold

I sold $3,261.37 of the High-Yield Corporate Fund to reduce its allocation a little. I also sold all of my Long-Term Investment Grade Bond (VWESX) holdings ($11,626.22) for a combined total of $14,887.59.

Stock purchases
None.

Distributions
I transferred $600 from Fund Cash into my Living Expense account. This is an automatic payment and represents about 13% of my Living Expenses that my Fund pays every month.

Fund Cash

Fund Cash is now at $4,104.66 with $2,589.04 of that reserved for future distributions, a sub-account which is being filled by dividend income. This leaves $1,515.62 available for new purchases. Cash has increased $707.58 since last month.

Portfolio Performance

My Income Fund increased in value from $270,307 to $284,146 this month, a new record high. This includes $7,472.34 of new capital.

I’ve been tracking my fund performance like an Index Fund since the beginning of the year and the underlying monthly investment performance in December was 2.37%. The new capital ‘purchased’ 68.4644 shares of my Income Fund and the end of month share price increased by $2.5131 to $108.7348.

I compare this price performance to the Vanguard Wellington Fund (VWENX) which decreased 0.44% in December, excluding dividends and capital gains. VWENX has a similar stock to bonds ratio as my Income Fund: two-thirds stocks, one-third bonds. My Year to date price increase is 8.73%, compared to 6.15% for VWENX.

The growth percentages only reflect price changes, not total return. A Total Return calculation would include the dividend plus the capital growth of the shares purchased with that dividend.

Comparing performance

Just for fun here’s a “growth of $10,000” chart with my Income Fund compared to VTSAX as well as to VWENX. This data excludes re-invested dividends so it’s a growth of price, not total return. (I’ll try to report Total Return instead starting next month – I used Price Return for now as it’s easier to calculate).

This month, my Income Fund gained on both the Wellington Fund (VWENX) and Total Stock Market, helped by a move towards more stocks in December which had a good month. The Wellington Fund’s asset allocation is much closer to mine although favors higher quality bonds. You can see the lower volatility effect that bonds have on the price – the VTSAX stock fund is more volatile than both my Income Fund and the Wellington Fund but also has better performance. See my Portfolio page for more details on the numbers.

Does the relative performance matter? Not to me; it just puts a boundary on the results to put it into perspective. VTSAX, being a total stock market fund, indicates the average performance that can be achieved by the US Stock Market by doing nothing other than buying more shares. Average doesn’t mean bad in this case – even average performance beats most active stock fund managers over the long-term.

Outlook

Vanguard announced new fees for VIHAX that will take effect from February 7th next year. This adds a 0.25% fee on any purchases or sales. The ETF share class is not affected, nor are purchases from re-invested dividends.

Purchase fees are typically added by funds that have high transaction costs for underlying stock purchases. The fund must buy new shares each time investors add money into the fund. If not covered by a purchase fee, transaction fees are usually charged as operating costs via the net Expense Ratio to all fund investors.

I’ve not yet decided if I’ll stay with the fund, convert tax-free to the ETF (VYMI) or go with something else (VFWAX). I’m expecting to buy about $5,500 of VIHAX next year which works out to a total cost of $14. So, I’ll most likely just stick with it for now.

Going forward in 2017, I’ll be adding most new money to VHDYX to meet its target allocation, as well as slowly converting the remainder of my former Emergency Fund (held in a money market account) to the IT Bond fund.

Summary

Well, it’s the end of a successful year as I exceeded my income goal for the year.

I changed my target asset allocation this month, although I’m now closer to my target allocation as a result. I will be paying closer attention on reaching my target allocation this year.

However, beating my 2016 goal of $7,800 is one more step in a rewarding journey to FI. The destination is still looking very far away but slow and steady wins the race.

How was your December? Are you one step closer to Financial Independence?

19 thoughts on “December Income Fund update”

Hi DD,
Thanks, yes most of my investments are held at Vanguard. They have good quality and cheap funds, and they offer discounts on stock purchases as the portfolio grows in size.
Thanks for stopping and commenting! Best wishes,
-DL

Hi Doug,
Yes it was a nice end to the year. The bulk of the income comes from the funds, but I like to hold some individual stocks too. I’m not as worried about diversification as I used to be since the funds do most of that for me. But around 20-30 seems a reasonable # of companies for me – I’m a little over that at the moment.
Thanks for stopping by – wishing you all the best for the new year,
-DL

Hey Erik,
Thanks! I do need to improve the comparison though since total return is really where it’s at. My income fund pays a ‘dividend’ of around 2%, so the distributions from the Vanguard Funds compared are likely to show a better total return. It’s certainly helped me understand how a mutual fund works and how expenses / distributions are handled. But I do think it’s important to show that you can do just as well with low-cost funds and avoid all the drama / fun of managing a more complex portfolio.

Not sure about $11k for next year but hopefully over $10k. I’m very conservative in my goals though which I’ll be posting shortly. I need to crunch the numbers some more and see where they land.
Appreciate your comment and visit 🙂
Best wishes,
-DL

Hi Roadrunner,
Thank you for commenting! I like the year to year comparison too – it shows the growth as you mention and also compensates for variations in monthly amounts due to payment schedule changes etc.
Congrats on starting your blog too! I’ll be following along on your journey.
Best wishes,
-DL

First off. CONGRATS on passing your goal. Simply amazing. Second love that you added nearly $8k during the month. Talk about doing everything you can to push your income forward and keep the momentum rolling into 2017. Can’t wait to see what you have in store for us in the coming year.

Hey Bert, Thanks! Your support and passion is really infectious! 🙂 Yes, am definitely looking forward to this year – am hoping for a surprise next month plus an onward and upward journey throughout the year!
Thanks for stopping by & best wishes,
-DL

What a way to finish off the year. Solid income for the month of December and congrats on killing your total for the year and beating your goal by a mile. Nice mix of stocks and funds. Good luck in ’17. I look forward to following your progress.

Think this is my first comment on your site, :), glad I found it! And I’ll be sure to continue to follow your journey. I also added your site to my bloglist and blogroll. Was hoping you could add my site to your list of blogs?

I’m very impressed by your YoY change in DEC, and by beating your 2016 goal. I definitely missed my goal, but that’s ok! Cool to see that we came in at almost the exact same amount for the year; congrats! Best of luck in 2017 and I know you’ll crush it.

Hi Dan,
Welcome to my blog 🙂 I’ll add your site to my blog list.
I’m very conservative in my financial goals as I want to avoid doing something risky to meet my goals. But I can certainly understand the need for stretch goals and pushing yourself too. I’ll be watching you beat your goals this year I’m sure.
Best wishes,
-DL

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